dissenting: I dissent from the majority opinion wherein it holds that $3,200 deposited with petitioner by its lessee on July 10, 1940, at the time the lease was executed and $5,000 deposited with petitioner by its lessee on January 3, 1941, when the lease was amended, were income to the petitioner in the years when such amounts were so deposited. The majority bases its holding upon the proposition that these amounts were received by petitioner as advanced rentals.
Of course, if these payments were in fact received as advanced rentals and could definitely be so identified, then there would be no doubt that .petitioner would be taxable thereon in the year of receipt. Astor Holding Co. v. Commissioner, 135 Fed. (2d) 47. And this would be true even though the contract of lease provides that such sums shall act as security for the performance of the lease covenants. Hirsch Improvement Co. v. Commissioner, 143 Fed. (2d) 920. But I do not think this rule applies where, as here, the lease contract provides:
* * * that at any time within a period of three (3) years after the date of this lease, the Lessee shall have the option of purchasing the said premises * * *. Lessor further agrees, provided the Lessee has faithfully performed all the conditions of said lease, and provided Lessee desires to exercise the option to purchase said premises as herein provided, to give credit and allow Lessee as payment upon the stipulated purchase price * * *, the sum of Three Thousand Two Hundred ($3,200.00) Dollars, which represents a sum equal to that paid by Lessee as security and for the last two months’ rental of said term; * * *
The $5,000 deposited with petitioner on January 3, 1941, was deposited under similar terms and conditions. Thus the two payments are in the same category. The majority opinion, after discussing certain cases which have dealt with this general subject, poses the following question as to these two payments: “Are the payments rent as opposed to purchase price?” It then goes on to hold that such payments were rents. In my opinion the question could not be answered during the years which we have before us.
Petitioner did not know and could not know whether it would ultimately have to apply these payments as rentals for the last five months of the lease or whether it would have to apply them as payments of part of the purchase price in case the lessee exercised its option to purchase within three years from the date of the lease. Until petitioner knew definitely how it would have to apply such payments, it could not determine its taxability thereon. Such an option to purchase is not a probability so remote as to require no consideration in determining when the amounts received should be taken into income. Such view it seems to me is in harmony with our decision in Virginia Iron Coal & Coke Co., 37 B. T. A. 195; affd. (C. C. A., 4th Cir.), 99 Fed. (2d) 919. In that case we held that payments received in 1930 and 1931 under an option to purchase stock or land and mineral rights which were to be applied upon the purchase price in case the option was exercised, but which were to be retained in case the option was not exercised, were income in the year in which the option was surrendered.
In holding against the contention of the taxpayer that the payments, if taxable at all, were taxable in the years when received under the option, we said:
The petitioner argues that the payments were either income when received, or were a return of capital which should have been irrevocably applied as a recovery of a part of the basis of the property, so that in neither event would the payments represent income in 1933. Neither of these arguments offers a proper solution of this case. It was impossible to tell in 1930 and 1931, when the payments were received, whether they would ultimately represent income to the petitioner or a return of capital. They were to be applied against the purchase price in ease of the exercise of the option. Had the option been exercised, they would have represented a return of capital, that is, a recovery of a part of the basis for gain or ‘loss which the property had in- the hands of the seller. In that event they would not have been income and their return as income when received would have been improper. Cf. Higgins Estate, Inc., 30 B. T. A. 814. * * *
In Virginia Iron Coal & Coke Co. v. Commissioner, supra, the court, in affirming our decision, said:
The year 1933 was the year in which the Texas Company notified the taxpayer that it surrendered all rights under the option and was the year in which the tax attached to the payments. The situation is in no way affected by the fact that the money became the property of the petitioner when received.
It is undoubtedly true that the $8,200 here in controversy became the property of petitioner in the years 1940 and 1941 when it was received, but under the principles approved by us and the Circuit Court of Appeals for the Fourth Circuit in the Virginia Iron Coal & Coke Co. case, such sums did not become taxable income to petitioner until in the year when it was definitely ascertained that such payments would not be used as a part of the purchase price of the leased property under the option to purchase it. Clearly, this did not happen in either of the taxable years which we have before us. Therefore, I dissent from the majority opinion, which taxes petitioner on these amounts in the years when they were received.
ARUNdell and Murdock, JJ., agree with this dissent.